Market Efficiency Of The Ethiopia Commodity Exchange The Case Of Export Coffee Trading

Despite the pivotal role of agriculture in the Ethiopian economy, the sector’s development isrnhighly constrained by infrastructural and institutional problems. To tackle part of therninstitutional problem, spot-trading Ethiopia Commodity Exchange (ECX) was established with arnvision to revolutionize the country’s agriculture through an efficient, dynamic, forward-lookingrnand orderly marketing system. This thesis is probably the first of its type to study the marketrnefficiency of the ECX in trading its major commodity, namely export coffee.rnThe Efficient Market Hypothesis (EMH) is widely used in market efficiency studies. This thesisrntested the weak form of EMH using the ADF, the Lo-MacKinlay variance ratio and the BDS testsrnfor random walk to study the price formation behavior of washed and unwashed export coffeesrntraded in the exchange for 16 months. The post estimation tests on the ADF regression showedrnthat ADF is inappropriate to use for the purpose for the study. The test for normality ofrnobservations also showed that parametric tests for random walk are not appropriate to studyrnmost of the prices series. The results from the non-parametric Variance Ratio and BDS tests,rnhowever, consistently showed that there are both linear and non-linear dependencies in the pricernseries of both commodities and there is no observable trend towards efficiency. To furtherrnstrength the results, the Spearman’s Rank Correlation coefficient results have supported thernpresence of a persistent and strong dependencies in the price series. The result thus entails that,rnwithin the study period, ECX is weak-form inefficient and there is possibilities of taking tradingrnposition that potentially offer traders excess profit using the predictability in the price series.rnThe result, however, is not surprising given the presence of price band limits, the infancy of thernExchange and most importantly the nature of the trading (spot-based) in ECX. To address thernmarket efficiency problem and other crucial issues, the Exchange has to shift to futures basedrntrading. As such shifts cannot be made overnight, some measures are recommended that can bernimplemented alongside the institutional development process in order to make the existing systemrna more efficient one.

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